Why there’s no end in sight to low interest rates

Why average workers' paychecks aren't buying what they used to: Mark Daly

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The economy is steaming along, or remains in dismal straits, depending on which political convention you watched. So why are interest rates still at historic lows eight years after the Great Recession of 2008-09?

The yield on a 10-year U.S. Treasury note traded at 1.336 percent on July 6, the lowest yield on record. Short-term interest rates aren’t much either. Bank of America reported it would take 107 years to double one’s money at 0.65 percent, the average yield for a 12-month certificate of deposit.

The most interesting theory about low interest rates appeared in a Wall Street Journal article in early July: Central banks around the world are buying and holding their own debt. This limits the supply, keeping prices high and interest rates low. It also reduces interest expense for the Treasury when one part of government pays another.

The U.S. Federal Reserve “taper tantrum” in 2013 began a reduction in the rate of buying, and the Fed now owns about 20 percent of U.S. debt. Now, the European Central Bank and Bank of Japan have initiated aggressive purchases of their outstanding sovereign debt.

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High-quality debt is getting harder to find. The share of bonds with the highest credit ratings has declined from 84 percent of sovereign debt outstanding in 2011 to 51 percent today. The ECB reportedly has been buying corporate debt and crowding out investors in the private sector. Besides savers taking a beating, pension funds and life-insurance companies now face higher competition for high-grade, long-duration bonds needed to make future payments.

It gets worse: Some countries are now experiencing negative interest rates. Banks and governments around the world are charging savers for the privilege of holding their money. That blows my mind. How can you grow your capital? Why would anyone consciously buy a bond that yields zero or has a negative yield? It defies all laws of common sense, but that is the upside-down world we live in today.

And what about real returns? (That is, a return over inflation that maintains purchasing power.) You guessed it: They are decidedly negative when the cost of living is applied to today’s ultra-low yields.

Financial repression and economic malaise could be the new normal for some time.